How to Make a Budget: Step-By-Step Instructions

Jun 3, 2015 | John S Kiernan, Senior Writer & Editor

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Budgeting isn’t fun. There’s no way around it. But budgeting is something that we must undertake in order to gain financial awareness and, ultimately, control both our spending and saving habits. The process of making a budget can be as simple or as complex as you want it to be, but you’ll want to record overall monthly inflows – take-home pay as well as other income sources – and outflows – amounts spent – at a minimum.

Most people will take things a step further, though, itemizing expenses, identifying specific spending trends and tracking savings goals over time. We’ll break down both approaches below.

Step 1 – Establish Goals:

A budget is a list of goals at its core. You intend to spend X amount of money on Y, for instance, which means that paying Z instead will leave you with either A in savings or B in debt. As a result, one must enumerate specific objectives in order to succeed at this endeavor. That can be done both at a high level and in the form of more specific, even daily, goals.

For example, your overall objective may be to get out of debt in 24 months. Or, maybe you’d like to save up for a $1,500 European family vacation next summer. Some financial maneuvering will be needed in order to achieve these objectives – increasing monthly savings or debt payments by a certain dollar amount for a certain period of time, for example. This will, in turn, necessitate careful expense allocation, which will ultimately serve as your recipe for success.

So, start by pinpointing your fundamental reason for creating a budget in the first place. Do you simply want to improve your financial awareness by identifying exactly where your money is going each month? Are you instead saving for a particular event – home repairs, college tuition, retirement and the like? Or perhaps you’re working your way to debt freedom and the security of an emergency fund?

This will dictate the extent of the changes that must be made to your day-to-day financial management, if any. Your budget will serve as the blueprint for these adjustments and ultimately the realization of your overarching objectives.

Step 2 – Set Parameters & Determine What To Track:

Much about a budget is at the user’s discretion, including the timespan you’ll be budgeting for – daily, weekly, monthly, etc. – as well as the types of expenses and income streams you’ll track and the manner in which you group them.

How you approach these decisions should ultimately depend on goals established in Step 1 as well as the amount of effort you are willing to put forth.

Step 3 – Choose A Template:

Budgeters have a host of effective budgeting tools at their disposal – from old-fashioned ledgers to complicated spreadsheet formulas. Your task is to cut through the clutter and find a reliable system that work for you. How you structure and record things ultimately depend on what you’re budgeting for, your technical skills and even what suits your eye.

Here are your basic options:

Method

Cost

Pros

Cons

Excel

Free with Microsoft Office (~$70)

• Most budget templates are made for Excel.• Useful for people of all technical levels.• Offers sophisticated analytical tools.

• Requires users to manually input information.• Can be a bit daunting for beginners.

Google Docs

Free

• Wide variety of budget templates.• Accessible to anyone with a computer connected to the Internet.

• Users must provide their bank account user names and passwords for the service to work.• Works on all platforms.

If you’re interested in a free template or just some inspiration, check out WalletHub’s editor’s picks for the Best Budget Templates.

Step 4 – Record Benchmarks:

In order to get the most out of the budgeting process, you’ll want to get a sense of your starting point. This will drastically improve your financial awareness and provide a basis by which to evaluate progress moving forward.

Start by tracking your spending for a month to see exactly how much you’re spending and on what exactly. You can do so by saving receipts and recording each purchase you make in your phone or a small notebook.

Step 5 – Itemize Expenses:

After determining the nature of your monthly spending, itemize the anticipated cost of monthly necessities like insurance, food, clothing, housing and health care. Then figure out how much you wish to allocate to your overall goal each month. This will dictate your timeline for accomplishment. After that, add as many discretionary expenses as your take-home pay and preferences allow.

That, in effect, is your budget – but it’s still theoretical. By tracking your expenses each budgeted interval and comparing reality to projection, you will gain valuable insight applicable to everyday life.

Step 6 – Develop A Maintenance Plan:

The true value of a budget comes with time. Not only will tracking your credits and debits allow you to see if you’re overspending, but you’ll also be able to see how your spending habits change over time.

The most logical approach, it seems, would be to schedule a time at the end of each month to update your figures. Your monthly bills will have been issued/paid, so you’ll have full information on hand. We recommend adding an alert to your phone and/or online calendar.

Step 7 – Reassess At Each Interval:

Blindly logging numbers each month won’t do you any good. You need to consider what the numbers mean. How does your spending compare to budgeted amounts? Do you notice any larger trends that may warrant a change in approach? These are the types of questions one must ask themselves if they want to get something out of the budgeting process.

Best Budgeting Tips

The above steps establish the practical parameters for how you will use your budget. In addition to those guidelines, here are a few tips for making the most of your budget.

Save A Backup: It’s simply too risky to have a single copy of your budget. So, Xerox photocopy your paper or save a digital copy on an external hard drive or a cloud account such as Dropbox.

Leverage Excel: If you’re using a spreadsheet to track your budget, it’s worth the trouble to learn some of the useful features conducive to budgeting, including the ability to automatically add up numbers and use formulas to unearth interesting insights from data. Here are a few articles that will help you grasp the basics:

Find A Budget Buddy: Simply telling someone else about your budget plans is helpful because it adds accountability to the equation. Having someone to share in the process with is even better because you can act as each other’s support system.

Make Sure You’re Committed: Drafted and forgotten budget templates can pile up as quickly as crumpled pieces of paper in a trashcan. But while the simple act of making a budget may have some therapeutic benefits and certainly provides practical perspective, the real value comes when you couple your budget with month-by-month (or week-by-week) expense tracking. Budgeted amounts are really goals, and goals necessitate follow-through and then follow-up.In other words, get your mind right if you’re serious about budgeting and, ultimately, improving your financial performance.

Ask the Experts: Effective Budgeting Explained

For more insights into the budgeting process, including effective strategies and money-saving measures, we posed the following questions to a panel of leading personal finance experts. You can check out their bios and responses below.

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Leon Chen

Assistant Professor of Finance at Minnesota State University, Mankato, College of Business

What distinction do you see between people who simply make budgets and those that actually adhere to them?

I think it is simply self-discipline, or the ability to resist temptation.

What do you believe is the key to effective budgeting? What tools are most conducive to this process?

Prioritize expenses; use an Excel spreadsheet. It is also important to realize that things do happen, so having access to emergency fund is important (e.g., HELOC). Budget some (not excessive) fun money too.

Over what time period should people make their budgets?

It depends on whether people perceive cash inflow would change much in the next few years. If cash inflow (revenue) is stable, make a monthly budget for the year, and then stick to it. Make necessary adjustments after one year.

Is any skill as important to personal financial management as budgeting? And, with that in mind, why don’t more people budget?

Basic Excel skill. I recommend sticking to one credit card, since it is easy to download to a spreadsheet to monitor your expenses.

Scott M. Spann

Resident Financial Planner at Financial Finesse, Inc

What distinction do you see between people who simply make budgets and those that actually adhere to them?

There is a major difference between people who simply establish budgets and those who follow through with them. Those who are action oriented are more likely to reach important financial life goals.

What do you believe is the key to effective budgeting? What tools are most conducive to this process?

Perhaps the biggest problem with the budgeting process is making the leap from having good intentions to follow a budget to actually following through with a plan. In fact, I refer to budgeting as a personal spending plan so the process becomes more meaningful and proactive. A key to sticking with a spending plan is realizing that it takes time to establish this important routine and life will happen along the way. I try to encourage people to realize this up front and prepare for the need to be flexible and adapt rather than get frustrated and quit.

What tools are most conducive to this process? I recommend tools such as Mint.com, YNAB.com, and Yodlee Money Center that help automate the process of creating and following a spending plan. For others, a simple one page spreadsheet or old school paper and pencil plan will do. It really comes down to finding a system that fits your personality and you will actually follow through with and monitor on a regular basis.

Is any skill as important to personal financial management as budgeting? And, with that in mind, why don’t more people budget?

Creating and following a budget is a fundamental financial behavior yet only 70% of employees in the workforce recently surveyed indicate they have a handle on their cash flow and spend less than they make each month.

John Gilliam

Associate Professor in the Department of Personal Financial Planning at Texas Tech University

What distinction do you see between people who simply make budgets and those that actually adhere to them?

It seems obvious but generally the discipline to carry through with what they have agreed to on the budget. The willingness to defer gratification today for something in the future. Sometimes, people learn this as they grow up. Often it is through the school of hard knocks where they have gotten themselves in trouble and had to fight their way out.

What do you believe is the key to effective budgeting? What tools are most conducive to this process?

An honest, realistic look at where their money is going. Then determining if that coincides with their values and goals.

There are many methods…from the old envelope method (allocating an amount each week/month for spending in each category) to a simple cash flow statement. Now there are many different computer programs and apps to keep on track, if we are willing to be accountable.

Over what time period should people make their budgets?

To start with, they should look at how they are paid: weekly, by-monthly or monthly. The goal is to determine where each dollar from the pay check is spent… and of course you should always pay yourself (savings, investing). After this is done, then look at things from a quarterly and ultimately an annual basis. For example, some auto insurance plans are payable every 6 month, if you own a home there may be taxes due each year. Of course the mortgage company usually sets up an escrow account for such items.

Is any skill as important to personal financial management as budgeting? And, with that in mind, why don’t more people budget?

Only the discipline to actually follow through. It’s like exercising... most people don’t want to hit the gym but after a while of doing it they actually enjoy it. As consumers, we are constantly bombarded with advertising that shows us items we “need” and often telling us how it will make our life easier all at a great price. I would suggest that people volunteer at a shelter or deliver meals to the poor/elderly. It has been my experience that doing something to help others that are not as fortunate as yourself is usually a great way to serve our communities and understand the importance of financial management.

Susan J. Crain

Professor in the Department of Finance and General Business at Missouri State University

What distinction do you see between people who simply make budgets and those that actually adhere to them?

The main reason for not adhering to a budget is a lack of commitment or self-discipline. Sticking to a budget is similar to sticking to a diet. I think most people start off with the best of intentions, but after one indulgence (for instance, buying that new technology toy), a person might say to himself/herself, “well I’ve already blown it this month so I’ll just go ahead and try that new restaurant I’ve been wanting to go to and follow that up with a trip to the movies. I’ll try to get back on track again next month.” The better path is to acknowledge that one mistake was made and get back on track immediately.

What do you believe is the key to effective budgeting? What tools are most conducive to this process?

The key to effective budgeting is to be realistic. Along these same lines, be honest with yourself about needs and wants. You “want” a BMW, but all you “need” is a car to get to work. You “want” to go to Italy on vacation, but you “need” to eat. A budget shouldn’t be something you despise, so allow yourself an entertainment category. Everyone “needs” to have fun on occasion, but you don’t have to break the bank in the process. Check out your community’s free activities including concerts, parades, art fairs, libraries, parks, walking trails, etc. Be daring enough to try something new that requires very little monetary outlay. Start a book club or buy a cheap deck of cards and teach your friends how to play bridge.

The most important tool for effective budgeting is information. The first thing to learn is how much you actually spend each month and what you spend it on. If you’re tech savvy, use a computer package such as Excel. If you’re not, use a piece of paper and a pencil to write down every dime. Then categorize your expenditures. Now here’s where the realism and honesty come into play. For each item, identify whether it was a want or a need. If your goal in preparing the budget is to save more, the “wants” can go on the chopping block. If every item was a need, you will have to take the next step and gather more information about ways to reduce those expenses. Search online for cents off coupons to use when grocery shopping. Search for the credit cards that offer cash rewards on your purchases and don’t charge an annual fee. Install a gas app on your phone to search for which filling stations in your area have the lowest gas price. If you’re a student, apply for scholarships.

Over what time period should people make their budgets?

Ideally, a budget would cover an entire year so that all expenses and incomes are accounted for. A yearly budget would include infrequent items such as annual doctor visits, tax refunds, or even oil changes in your car. But realistically, for the first time budget preparer, this could be too daunting a task. So start with one month to get the ball rolling, then extend it to 3 months, then to 6 months, and finally to one year.

Is any skill as important to personal financial management as budgeting? And, with that in mind, why don’t more people budget?

For the average person, a budget would be the most important factor in sound financial management — as it is for businesses and governments. As a former agricultural lender, the first item I looked for in a loan application for operating expenses was the borrower’s detailed budget. If the prospective borrower didn’t have a good idea of what the income and expenses would be over the next year, he/she was told to go home and figure it out. On a personal level, the key to a successful financial future is to know firsthand the information that is reflected in a budget. There are a few people that have the ability to manage their finances quite successfully without ever preparing a budget. But for the rest of us without that innate ability, we have to acquire budgeting skills.
I suspect that some people don’t budget because they think they don’t have good “number sense” and it would be a wasted effort. Other people don’t budget because they really don’t know what it entails. No one has ever shown them how it’s done so they may have the misperception that it just takes too much time. Plus, they may not understand why it is important.

Image: vinnstock / Shutterstock

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